The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

by Ron Chernow

  For Pierpont and Fanny, Sundays were devoted to religion. They attended Saint George’s Church on Stuyvesant Square, where Pierpont had been a vestryman since 1868, and spent Sunday evenings singing hymns. To gratify Fanny, Pierpont also attended Wednesday evening sessions of the Mendelssohn Club, a choral group. In his early years, he had a strongly prudish streak. In general, his religious interests weren’t tied to codes of earthly conduct. Religion moved him on a more primitive level. Whether roaring out hymns at revival meetings or sitting alone in Saint George’s, savoring organ music in semidarkness, he seemed mesmerized by ritual and lapsed into reveries of mystic depth.

  Approaching Scripture with the literalism of a fundamentalist, Pierpont was as credulous as a child. In 1882, he visited Palestine. Deeply moved, he wrote Fanny about the sensations he experienced before the doorway of Christ’s sepulcher: “There is the slab on which He was laid. Impelled by an impulse impossible to resist you fall on your knees before that shrine.”12 In later years, he told his librarian, Belle da Costa Greene, that he believed every word in the Bible, including the account of Jonah and the whale. Once traveling down the Nile with Bishop William Lawrence, he pointed out the precise spot where Moses was plucked from the bulrushes and insisted it happened exactly as set forth in the Bible. In view of this credulity, it is not surprising that Pierpont was fascinated by the occult. For years, he commissioned the astrologer Evangeline Adams to read his horoscope, asking her to study his stars on everything from politics to the stock market. When his son, lack, was born, the infant’s horoscope showed a cardinal cross, associated with depressions—an apt prophecy for the Morgan who steered the bank through 1929.

  In 1883, the thirty-three-year-old Rev. William S. Rainsford took over as Saint George’s rector. He was a handsome young Irishman with a Cambridge education. Having bankrolled the church’s activity, Pierpont had a hand in his appointment. As a social reformer and fiery exponent of the “social gospel,” Rainsford told Morgan he would take the job only if the church were democratic and open to the poor. “Done,” said Morgan, who agreed to make up the church’s deficits.13 And Rainsford indeed welcomed the poor into Saint George’s now-free pews. Eventually the two men became so close that they had breakfast together every Monday morning at 219 Madison Avenue, and Morgan built several new church buildings.

  Dr. Rainsford later ran into trouble when he tried to enlarge and democratize the vestry, which met in Morgan’s “black library.” This went against the grain of Pierpont’s arm’s-length philanthropy, and he bluntly retorted: “I do not want the vestry democratized. I want it to remain a body of gentlemen whom I can ask to meet me in my study—gentlemen who would feel at home and who could make up deficits out of their pockets.”14 He sent a letter to Rainsford, resigning his post as senior warden; the young rector stubbornly refused to accept it. For several weeks, the two men continued their Monday breakfasts, both eating in silence. During these meals, Pierpont may have recalled the rich men who hounded his reformer grandfather, the Reverend Pierpont. After several weeks of this standoff, Morgan invited Rainsford to see him set sail for Europe. Alone with Rainsford in his stateroom, Pierpont threw his arms around him and exclaimed, “Rainsford, pray for me, pray for me.”15 The feud ended with this melodramatic display of contrition.

  Rainsford has left interesting impressions of Pierpont’s religious faith: “His beliefs were to him precious heirlooms. He bowed before them as the Russian bows to the ’ikon’ before he salutes the master of the house.”16 He saw that for Pierpont the Church wasn’t an active, reforming spirit, but a repository of ancient beauty, powerful because it was archaic and unchanging. Rainsford also credited Pierpont with intense loyalty and forthright honesty: “When he said a thing, and looked full at you as he said it, to doubt him was impossible.”17 It was the same look that transfixed two generations of railroad presidents and industrial moguls.

  ALTHOUGH the business life of Pierpont Morgan was bound up with the railroads, Pierpont felt more keenly the allure of the sea. At a time when private railroad cars were common showpieces among tycoons, Pierpont never owned one and took private cars, as needed, from the railroads he directed. By midlife, the sea was his best remedy for depression, the place where he escaped from the perpetual strain of the office and was liberated from care. When a yacht-owning fad swept fashionable New York in the 1880s, he needed little inducement to participate. In 1882, he bought the first of a series of enormous yachts, named Corsair, and joined the New York Yacht Club. This black-hulled steam yacht—165 feet long and the second largest in the club’s fleet—marked a new Morgan magnificence.

  It was probably no coincidence that Pierpont bought the Corsair soon after it first became apparent that his marriage was disintegrating. The boat was more than a showy bauble. It gave him a social setting beyond Fanny and the children and would later figure in many stories of secret revelry. It permitted an outlaw life beyond the stuffy Victorian bounds of his early married days. He created a group of friends known as the Corsair Club, which provided the camouflage needed to smuggle women on board. The ship was also a second home, particularly when Fanny and the children retreated up the Hudson to Cragston for the summer. Often, Pierpont would dine on the ship and spend the night as it lay at anchor off Manhattan.

  Purchase of the Corsair coincided with a new phase in Pierpont’s career, in which he became an arbiter as well as a financier of railroads. The boat was useful as a meeting place to settle disputes, a secret clubhouse beyond spying eyes. Pierpont had an actor’s talent for creating dramatic backdrops for his exploits, and the Corsair allowed his business life to take on an aura of operatic flamboyance. This was never truer than in the 1885 dispute between the Pennsylvania Railroad and the New York Central over a railroad called the West Shore.

  Pierpont’s involvement had a personal dimension. One day in 1881, he saw a peddler leading a pair of donkeys up Broad Street; delighted by their resemblance to small donkeys he had seen in Egypt, he sent a clerk out to buy them. Christened Beelzebub and Apollyon, they were favorites of the Morgan children at Cragston. The following year, his children felt menaced by Irish ruffians building a new railroad below his house on the Hudson’s west bank, and Pierpont forbade them to ride unaccompanied by an adult. At the same time, blasts of explosives from the construction of this new West Shore road rattled Cragston’s windows, invading the tranquil Morgan hideaway.

  The West Shore was that railroad bane of the period—the blackmail line. Extortion artists would lay down parallel lines just to be bought out by an established road. Since railroads were natural monopolies and couldn’t survive much direct competition, they could be easily threatened by small competitors. The West Shore ran up the west side of the Hudson, parallel to the New York Central on the opposite bank, then tracked the Central to Buffalo. It was widely believed the powerful Pennsylvania Railroad stood behind the West Shore. So in retaliation, the New York Central broke ground on a South Pennsylvania road to compete with the Pennsylvania from Philadelphia to Pittsburgh.

  A fierce rate war between the West Shore and the New York Central hammered down stock and bond prices for both companies, confirming Pierpont’s growing hatred of competition. It came at a precarious time for railroad bankers. During a stock market plunge in 1883, there was a near-panic in American rail stocks in London, producing a rising clamor for a financial czar who could arbitrarily settle such disputes. Cyrus Field cabled Junius, “Many of our business men seem to have lost their heads. What we want is some cool-headed strong man to lead.”18 As fiscal agent for the road, Junius watched with alarm as New York Central stock fell below par for the first time; its dividend was halved. In early 1885, Pierpont went to London to consult with Junius and fumed over the “absurd struggle for preeminence” plunging America’s railroads into internecine warfare.19 By the spring of 1885, the West Shore had gone into the hands of a receiver, while the hard-pressed New York Central deferred critical maintenance.

  It seems anomalous
that America’s most famous financier was a sworn foe of free markets. Yet it followed logically from the anarchy of late nineteenth-century railroads, with their rate wars, blackmail, lines, and lack of standardized gauges. To destroy competing lines, railroads could simply refuse to transfer freight to roads that abutted theirs. From an engineering standpoint, Pierpont knew little about railroads. What he did know was that they required steady revenues to cover their fixed interest costs on bonds marketed in New York and London. In the mid-1880s, freight rates were declining sharply under the pressure of savage price-cutting. Pierpont decided that “the principal thing was to secure a harmony between the Pennsylvania and New York Central.”20

  On the sultry morning of July 20, 1885, with an impresario’s flair, Pierpont staged a reconciliation between America’s two largest railroads. After picking up the New York Central’s president, Chauncey Depew, he crossed to a New Jersey pier and took aboard George H. Roberts, president, and Frank Thomson, vice-president, of the Pennsylvania Railroad. Pierpont always denied his yacht was chosen for the sake of secrecy. “I do not know that that was a part of the consideration,” he later testified. “It might have been.”21

  Before bringing both parties on board, he worked out the broad outlines of a truce. While the Corsair sailed up and down the Hudson, he sat under the rear awning, flanked by the railroad chiefs and smoking his nightmarishly huge black cigar. He stressed the displeasure of European investors with American railroads, but mostly let the railway men debate among themselves. In general, he used two negotiating ploys. He would create a “no-exit” situation and add to it threats that his rivals faced a deadline—a way of building tension and softening up the parties. Also, by saying little, he underscored his position as honest broker and permitted the antagonists to vent their anger. Pierpont was, by nature, a laconic man. He had no gift for sustained analysis; his genius was in the brief, sudden brainstorm. As one lawyer said of him, “Morgan has one chief mental asset—a tremendous five minutes’ concentration of thought.”22 By the time the railroad presidents were deposited on their respective shores at seven o’clock that evening, they had agreed to buy out each other’s lines and desist from their mutually destructive warfare. Years later, the tunnels and embankments from the abandoned South Pennsylvania line would be incorporated into the Pennsylvania Turnpike. And as the New York Central’s business expanded, it enlisted the West Shore tracks for a second line along the Hudson River.

  The newspapers lionized the author of this Great Railroad Treaty of 1885, also known as the Corsair Compact.23 Pierpont had pulled off such a masterly feat that even Junius—so stingy with compliments—told Fanny, “Pierpont handled the West Shore affair better than I could have done it myself.”24 Pierpont was forty-eight when Junius voiced this unprecedented compliment. Once again, Pierpont had performed the kind of task of industrial arbitration that would later be left to courts and public commissions. In the rough-and-tumble of the Baronial Age, competition was naked and brutal, and businessmen lacked trade groups in which they could discuss common problems. Bankers could intervene as neutral parties, particularly where, as with Drexel, Morgan, they had performed work for both companies. Over the years, Pierpont would employ the sharpest lawyers, yet his preferred style was more British—informal deals, handshakes over brandy and cigars, cordial clubroom chats among bankers as they stood in frock coats and stiff collars. The Morgans were never litigious. During one railroad battle, Junius wrote Pierpont, “I hope you will not be tempted into litigation. Life is too short for that.”25

  Bloodletting among railroads intensified in the 1880s. Several rail roads skirted bankruptcy. In 1886, Drexel, Morgan reorganized the big Philadelphia and Reading Railroad. This involved issuing new bonds with lower interest rates and assessing shareholders to lighten the burden on the line. The revived railroad was then taken over by a Morgan antagonist named A. Archibald McLeod, who later declared, “I would rather run a peanut-stand than be dictated to by J. P. Morgan.”26 He freely defied Morgan and invaded the territory of his other railroads. The experience would convince Pierpont not to release his grip on reorganized companies.

  The basic weakness with America’s railroad system was overbuilding, which forced the roads into endless rounds of rate cuts and wage cuts to service debt. At the same time, the massive power of their largest consumers—notably Rockefeller in oil and Carnegie in steel—forced them to grant preferential rebates to big shippers, enraging small western farmers and businessmen and stimulating calls for government regulation. For Pierpont, the leading symbol of railway monopoly, pure competition was never an option. Years later, he said, “The American public seems to be unwilling to admit . . . that it has a choice between regulated legal agreements and unregulated extralegal agreements. We should have cast away more than 50 years ago the impossible doctrine of protection of the public by railway competition.”27 As we shall see repeatedly, the House of Morgan always favored government planning over private competition, but private planning over either.

  In 1887, Congress passed the Interstate Commerce Act, the first regulatory commission, which enshrined competition as its guiding principle and eliminated the controversial rebates. Supporters of the act formed a diverse constituency, ranging from small shippers to the railroads themselves; the latter accepted the inevitability of regulation and hoped that in the proper form it might provide some sorely needed stability. But within six months of the creation of the Interstate Commerce Commission, the rebates reappeared. Hence, in 1888 the railroad chieftains decided to graft their own form of self-regulation on the ICC framework under the aegis of Pierpont Morgan.

  That December, newspaper readers were regaled with accounts of mysterious doings at Morgan’s Murray Hill home. As reporters staked out the house, they saw a procession of western railroad presidents and bankers disappear inside. Those arriving included Charles Francis Adams of the Union Pacific and a ghastly sick Jay Gould representing the Missouri Pacific. The Morgan house was under siege: reporters kept ringing the doorbell and fixed opera glasses on the windows. Inside, at the head of his library table, Pierpont opened the discussion with these words: “The purpose of this meeting is to cause the members of this association to no longer take the law into their own hands when they suspect they have been wronged, as has been too much the practice heretofore. . . . This is not elsewhere customary in civilized communities, and no good reason exists why such a practice should continue among railroads.”28 Clearly, Pierpont’s European experience formed his frame of reference.

  Backed by representatives of Barings and Brown Brothers, Pierpont offered the railroad presidents a deal: if they refrained from rate-cutting and cutthroat competition, the financiers would stop underwriting competing railways. It was a clever move, for while Wall Street accused the railroads of irresponsible behavior, the railroads blamed Wall Street for floating too many securities and creating the overexpansion that led to price wars. Morgan himself was accused of sponsoring overcapitalized lines that couldn’t weather recessions because of their heavy debt load. The December 1888 meetings produced a gentleman’s agreement to maintain rates for sixty days; then the group would reassemble at Morgan’s house.

  A similar gathering took place at Pierpont’s “black library” in January 1889. This one yielded plans for a huge centralized group to regulate the entire rail system—the Interstate Commerce Railway Association. This behemoth would set rates, arbitrate disputes, and mete out fines to offending railroads. Pierpont was to head the cartel. The New York Sun called the new group “nothing short of a revolution in railroad methods.”29 But the new group soon fell apart under the pressure of western rate wars.

  Pierpont’s last stab at establishing railroad stability took place at a meeting on December 15, 1890. Besides the earlier luminaries, this gathering drew Stuyvesant Fish of the Illinois Central, fames J. Hill of the Great Northern, and T. F. Oakes of the Northern Pacific. Pierpont presented a plan for a Western Traffic Association, which would include
one director from each railroad and would set uniform rates; any railroad that cheated would be discharged. He was mightily pleased with his plan. In a rare burst of public candor, he exulted to a reporter, “Think of it—all the competing traffic of the roads west of Chicago and Saint Louis placed in the control of about 30 men!”30 The statement is splendidly innocent, yet perilously blind. Pierpont believed so implicitly in his own fairness and good judgment that he saw no harm in a large section of America’s economy coming under his personal dominion. The New York Herald blared, “RAILROAD KINGS FORM A GIGANTIC TRUST.”31 Before too long, this plan, too, would crumble.

  In the last analysis, the gentleman’s agreements suffered the historic fate of cartels. They couldn’t control small outside competitors, who cut rates, outflanked larger rivals, and won new business. With surreptitious cheating and lack of discipline, deals soon collapsed. Even the now-immense authority of Pierpont Morgan couldn’t solve the structural problems caused by too many railroads chasing too few passengers and owing too much money. As scores of railroads went bankrupt during the 1893 panic, Pierpont would reorganize many of them and use controversial new techniques to bring about order.

  This phase of Pierpont’s life shows that his real vice was not money but power. This was not power of a pathological sort, not power to bully men and bask in glory—though there was some of that—but power to take what he saw as a topsy-turvy financial world and set it right. Among robber barons, he was unique in suffering an excess of morality. He believed that he could master the problems of his era at a time when others were confused by the sheer dynamism and speed of economic change.